What the Federal Budget means for you

With a Federal Election expected to be announced within days, the Treasurer, Josh Frydenberg, unveiled his much anticipated Federal Budget for 2019-20 last night.

There are big tax cuts for lower and middle income earners, designed to kick in when you lodge your tax return in just a few weeks’ time.

There’s also a boost to small and medium sized businesses with a big expansion of the instant asset tax write off scheme.

But, there’s a catch.With the Budget unveiled so close to the announcement of an election, there is no chance that any of these measures will get through Parliament before the election is called. That means that everything announced will only become law if the Coalition wins the election or if Labor agrees to match the government’s announcements.

H&R Block has analysed the impact of his measures on individuals and small businesses in detail below but the key headlines are:

Mr Frydenberg announced plans to cut personal income taxes for all individuals earning up to $126,000 each year. He said that the cuts would be worth up to $1,080 for individuals or $2,160 per year for dual-income households per year. Up to 4.5 million Australians on middle incomes will enjoy the full tax cut. About another 5.5 million will receive a tax cut of roughly half those amounts.

The cut will be provided by extending the Low and Middle Income Tax Offset, first announced in last year’s Budget. The offset will apply for the 2018-19 year and will be claimed through your tax return. So, if you’re eligible for the tax cut, you’ll receive it by lodging your tax return at Tax Time this year.

In essence, you’ll either get a bigger refund or a smaller tax liability. Either way, the size of the tax cut will be a powerful incentive to lodge your return as soon as practicable after 1 July.In addition, Mr Frydenberg announced additional changes to personal taxes to come into effect in 2024-25. Under the changes, the 37 per cent tax rate, which currently applies to annual earnings of between $90,001 and $180,000 would be scrapped entirely, and the 32.5 per cent tax rate (covering annual earnings of $37,001 to $90,000) would be cut to 30 per cent.

The lowest tax band, charged at 19 per cent on earnings of $18,201 to $37,000, would be expanded to cover earnings of up to $45,000, while the highest tax band, which currently kicks in on earnings over $180,000 would be only apply to incomes over $200,000.

The effect of the changes is that all taxpayers on salaries of between $45,001 and $200,000 would pay tax at the lower rate of 30 per cent.

There is a dramatic extension of the instant asset write-off deduction for capital assets acquired by small businesses. The scheme will now apply to all individual purchases of capital assets costing up to $30,000. In addition, the number of businesses eligible to participate will increase as the turnover threshold for qualifying is increased from $10 million to $50 million. This announcement follows an earlier move, just a few weeks ago, to increase the scheme to cover assets costing up to $25,000.

Mr Frydenberg said the changes to the scheme would support cafes to buy a new fridge or grill, a plumber to buy more tools or a courier to purchase a new vehicle and claim an up-front deduction.

The government says around 22,000 additional businesses employing around 1.7 million workers will now be eligible to access the instant asset write-off.

The Detail

Personal Taxes

The Government announced it will provide a further reduction in personal taxes through an increase in the non-refundable low and middle income tax offset (LMITO).

Under the changes, the reduction in tax provided by LMITO will increase from a maximum amount of $530 to $1,080 per annum and the base amount will increase from $200 to $255 per annum for the 2018-19, 2019-20, 2020-21 and 2021-22 income years.

The LMITO will now provide a reduction in tax of up to $255 for taxpayers with a taxable income of $37,000 or less. Between taxable incomes of $37,000 and $48,000, the value of the offset will increase at a rate of 7.5 cents per dollar to the maximum offset of $1,080.

Taxpayers with taxable incomes between $48,000 and $90,000 will be eligible for the maximum offset of $1,080. From taxable incomes of $90,000 to $126,000 the offset will phase out at a rate of 3 cents per dollar.

The LMITO will be received on assessment after individuals lodge their tax returns for the 2018-19, 2019-20, 2020-21 and 2021-22 income years. This is designed to ensure that taxpayers receive a benefit when they lodge returns from 1 July 2019.

Further rate and threshold changes from 1 July 2022 and beyond.

From 1 July 2022, the Government proposes to increase the top threshold of the 19% personal income tax bracket from $41,000, as currently legislated, to $45,000. The threshold is currently $37,000.

Also from 1 July 2022, the Government proposes to increase the low income tax offset (LITO) from $645, as currently legislated, to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000, instead of at 6.5 cents per dollar between taxable incomes of $37,000 and $41,000 as previously legislated. LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.

Together, the increase to the top threshold of the 19% personal income tax bracket and the changes to LITO will lock in the reduction in tax provided by the LMITO when LMITO is removed.

From 2024-25, the Government said it would reduce the 32.5% marginal tax rate to 30%. In that year, an entire tax bracket, the 37% tax bracket, will be abolished under the Government's already legislated plan. With these changes, by 2024-25, the government says that around 94% of Australian taxpayers are projected to face a marginal tax rate of 30% or less.

Therefore, with the Government's announced changes, from 2024-25, there would only be three personal income tax rates – 19 per cent, 30 per cent and 45 per cent. From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30 per cent.

Medicare levy low-income thresholds for 2018-19

For the 2018-19 income year, the Medicare levy low-income threshold for singles will be increased to $22,398 (up from $21,980 for 2017-18). For couples with no children, the family income threshold will be increased to $37,794 (up from $37,089 for 2017-18). The additional amount of threshold for each dependent child or student will be increased to $3,471 (up from $3,406).

For single seniors and pensioners eligible for the SAPTO, the Medicare levy low-income threshold will be increased to $35,418 (up from $34,758 for 2017-18). The family threshold for seniors and pensioners will be increased to $49,304 (up from $48,385), plus $3,471 for each dependent child or student.

Small business taxes

Instant asset write-off extended

The Budget contains important changes to the instant asset write-off rules. These changes are in addition to other changes announced a few weeks ago.

There are two key changes:

First, the write-off has been extended to medium sized businesses, where it previously only applied to small business entities.

Secondly, the instant asset write-off threshold is to increase from $25,000 to $30,000. The threshold applies on a per asset basis, so eligible businesses can instantly write-off multiple assets.

The threshold increase will apply from 2 April 2019 to 30 June 2020.

Small businesses

Small business entities (i.e. those with aggregated annual turnover of less than $10 million) will be able to immediately deduct purchases of eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night (ie 2 April 2019) to 30 June 2020.

Small businesses can continue to place assets which cannot be immediately deducted into the small business simplified depreciation pool and depreciate those assets at 15 per cent in the first income year and 30 per cent each income year thereafter. The pool balance can also be immediately deducted if it is less than the applicable instant asset write-off threshold at the end of the income year (including existing pools). The current "lock out" laws for the simplified depreciation rules (ie these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2020.

Medium-sized businesses

Medium sized businesses (i.e., those with aggregated annual turnover of $10 million or more, but less than $50 million) will also be able to immediately deduct purchases of eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night to 30 June 2020.

The purchase date is critical. The concession will only apply to assets acquired after 2 April 2019 by medium sized businesses (as they have previously not had access to the instant asset write-off) up to 30 June 2020.

Medium sized businesses do not have access to the small business pooling rules and will instead continue to depreciate assets costing $30,000 or more (which cannot be immediately deducted) in accordance with the existing depreciating asset provisions of the tax law.

Arrangements prior to 2 April 2019

The Government has already legislated a $20,000 instant asset write-off for small businesses. Eligible small businesses can already immediately deduct purchases of eligible assets costing less than $20,000 that are first used or installed ready for use by 30 June 2019.

On 29 January 2019, the Government announced that it would increase the instant asset write-off threshold for small businesses from $20,000 to $25,000 and extend the instant asset write-off for an additional 12 months to 30 June 2020.

These changes interact with the changes being announced as part of the Budget. This means that, when legislated, small businesses will be able to immediately deduct purchases of eligible assets costing less than $25,000 that are first used or installed ready for use over the period from 29 January 2019 until Budget night.

Date of effect

The changes announced in the Budget will apply from 2 April 2019 to 30 June 2020.

The threshold is due to revert to $1,000 on 1 July 2020 (subject of course to further changes in next year’s Budget!)

Mark Chapman

Mark Chapman is Director of Tax Communications for H&R Block Australia. He has been a tax adviser specialising in advice for individuals and small businesses for over 20 years, in both the UK and Australia. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from University of New South Wales. To find out more about how H&R Block can assist your small business, visit www.hr.block.com.au